Demand Spikes Both Domestic and Foreign Send US Gas Prices Surging

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The US gas futures market staged a convincing rally into the $4-teens per million Btu last week and is showing few signs that it will back down this coming week even though conventional market analysis would demand it. Simply put: the US market is caught in a most unusual position as prices are pulled upward by gas demand from overseas, leading to prices untenable for a North American market designed to thrive at much lower price levels. Growing LNG capacity and a much higher than expected utilization are the main factors. When Cheniere Energy’s Corpus Christi LNG facility came on line in March, it increased total US capacity to 75 million tons per year, which would support feedgas demand of nearly 11 billion cubic feet per day. The US Energy Information Administration (EIA) estimates that US terminals collectively sucked in 10.5 Bcf/d of gas last week, so the country's liquefaction plants are definitely humming. Meanwhile, more projects are being rolled out that will bring total liquefaction capacity to almost 80 million tons/yr by early 2022 and 89.7 million tons/yr by 2023, or 12.3 Bcf/d. And last week's gas storage report is a harbinger of things to come, an energy analyst who specializes in meteorology told Energy Intelligence. The data showed a rather light 13 Bcf injection, but why it was light -- and why it was 8 Bcf below consensus -- was an "amazingly large" 23 Bcf withdrawal in the South Central region. "I hasn't been drastically hot in Texas, in fact, it's been relatively mild," he said, and that lackluster weather demand extended to most of the Southeast region. "But demand is there in a big way," he continued -- so much so that if it had actually been hot the US might have seen a net drawdown. "There's been an undoubted tightness in the weather-independent supply-demand imbalance that is being exacerbated by high global prices," which is driving feed gas demand at US Gulf Coast LNG export terminals, he said. So the market is no longer responding just to US weather, but to weather overseas as well. Need proof we've entered that uncharted territory? Something as random as a Brazilian mega-drought is increasing the call on US gas supply. With its hydropower slashed and inadequate gas supply to fuel its backup gas power plants, Brazil has tripled imported LNG volumes mainly from the US to 0.7 Bcf/d so far this year, compared with average volumes of 0.2 Bcf/d over the previous five years. Too High Too Fast? Still, there are consequences when gas prices rise too high for the US market. For instance, with spot and futures prices at lofty levels, last week's gas burns averaged 37.8 Bcf/d, down 3 Bcf/d from the previous week and almost 6 Bcf/d shy of last year's burns -- presumably because operators were switching from gas to coal when they could. "We are fundamentally and technically overbought at this junction," the analyst said. Prices are not likely to back down soon if expected hot weather does envelop the US, except for the Southwest, Texas and along the Gulf Coast, he said, even if outlooks are beginning to shorten the heat wave's duration. Nonetheless, the coming heat might well have jacked the market even higher if the $4.20 intraday high Thursday by the September Nymex contract hadn't precipitated profit taking. Early last week, the contract yo-yoed above and below $4/MMBtu before those hot forecasts pushed it higher. September closed at $4.14/MMBtu Friday, flat to Thursday. The contract gained a healthy 22.6¢, or 5.8%, for the week.. The EIA reported that 13 billion cubic feet of gas was injected into storage during the week ended Jul. 30, bringing working gas inventories to 2,727 Bcf. A larger build of 21 Bcf was expected. The injection compares with the 30 Bcf five-year average and the 32 Bcf injection during the same week last year. Storage levels are 185 Bcf, or 6.4%, below the seasonal average and 542 Bcf, or 16.6%, below last year’s levels. Meanwhile, models for the week ended Aug. 6 are for a build of 49 Bcf, with a range of 17 Bcf to 56 Bcf. That compares with a five-year average increase of 42 Bcf and a 55 Bcf injection during the same week last year. In the oil market, September West Texas Intermediate crude fell 81¢ Friday to close at $68.28 per barrel and was down $5.67, or 7.7%, for the week. Tom Haywood and Lisa Lawson, Houston

Gas Demand, Gas Inventories, Coal, Gas Prices
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